Court to rule on Puerto Rico debt-relief options

For the second time in the current Term, the Supreme Court on Friday agreed to look into the Puerto Rican government’s authority to manage its own affairs. This time, the commonwealth is seeking an opportunity equal to the states to restructure its public debt. The island’s debt is massive and still growing.

The Court accepted two cases for review and consolidated them for one hour of oral argument, probably in March. One is an appeal by the commonwealth’s officials, the other by the agents of its Government Development Bank. Puerto Rico passed its own law last year to restructure some of its debt, but a federal appeals court struck that down as conflicting with federal bankruptcy law — even though Puerto Rico does not have access to bankruptcy the way other local governments do. An earlier granted case will focus on whether the island government is independent of the federal government, at least for purposes of enacting criminal laws; that case, Puerto Rico v. Valle, is to be argued January 13.

The Court granted review in three other cases on Friday, involving: the application of the constitutional right to a speedy trial to a follow-up sentencing proceeding (Betterman v. Montana); a definition of when a government contractor has filed false reimbursement claims under the False Claims Act (questions 2 and 3 in Universal Health Services v. United States ex rel. Escobar); and a claim for attorney’s fees for an employer when the Equal Employment Opportunity Commission does not carry out its assigned duties before a lawsuit is filed (CRST Van Expedited v. EEOC). Those cases, too, are likely to be argued in March.

Puerto Rican officials had told the Court in the new cases that the island government “is on the brink of insolvency,” with public debt reaching at least $73 billion, plus an added $40 billion in pension benefits owed to retired public employees.

The actual status of the island’s debt situation is fluid at the moment, because there have been intermittent discussions with holders of its public utility bonds about a possible deal. But the underlying legal question is a straightforward one of interpreting Chapter 9 of the federal bankruptcy code, as rewritten by Congress in 1984.

When Congress completely revised the code in that year, it included a section on acquisition of debts and how they would be treated legally. It includes Puerto Rico as the equivalent of the states, territories, and the District of Columbia. However, a special provision said that Puerto Rico and the District of Columbia could not be classified as debtors under Chapter 9.

That is the provision that allows municipal government to be treated as debtors, and file for relief under the bankruptcy code. Detroit, for example, was an important illustration of Chapter 9’s usefulness to local governments that have run up heavy debt. Prior to the 1984 revision, Puerto Rico apparently had been eligible to file for bankruptcy under prior provisions.

Rating agencies had downgraded its general obligation bonds and bonds issued by its utilities, putting them below investment grade. Seeing a debt crisis looming, hitting essential public services especially hard, Puerto Rico’s legislature passed a recovery law in 2014. On the day the governor signed it into law, two groups of investment funds — holding more than $2.2 billion of bonds issued by the utilities — filed a lawsuit to contest the recovery act under bankruptcy law.

Ultimately, the U.S. Court of Appeals for the First Circuit, which hears appeals in federal cases originating in the commonwealth, ruled that Puerto Rico was excluded by Chapter 9 from being a bankrupt debtor under the code. That preempted its local law, the First Circuit concluded.

Appealing to the Supreme Court, commonwealth officials argued that the First Circuit’s decision leaves the island with no access “to any legal mechanism to restructure” its utilities’ debt. Its only option, they said, was to go to Congress in an attempt to get Chapter 9 amended.

Although the two petitions do not raise a constitutional issue, one of the judges on the Circuit Court did argue that Chapter 9’s treatment of Puerto Rico not only was an unconstitutional form of discrimination, but violated the basic principle that the bankruptcy law should be uniform for all jurisdictions.

Whether the Court’s decision to hear these cases will have an effect on the attempts to find a negotiated solution cannot be known at this point.

The Court’s willingness to hear the two new controversies over Puerto Rico’s status suggests that the Justices are becoming more sensitive about the relationship between the commonwealth and the U.S. government — a topic of ongoing and sometimes disruptive public debate among Puerto Ricans themselves.

Earlier this week, the Senate Judiciary Committee held a hearing on the debt situation in Puerto Rico, to explore whether there were legislative options. The Obama administration recently completed a report calling on Congress to pass new relief for the commonwealth.